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California's pension system must be changed, Milken Institute report says

October 19, 2010 | 6:33
pm

Wrapping up its State of the State Conference at the Beverly Hilton on Tuesday, the Milken Institute released a sobering look at California's pension system. Its conclusion: Dramatic changes are needed to cope with demographic trends and funding shortfalls.

"We're talking about a perfect storm: more state services needed for an aging population, a workforce that will spend more years in retirement than they did contributing to the funds, and a smaller ratio of working-age taxpayers and contributing state workers to pay for it all," said Perry Wong, director of regional economics at the Milken Institute.

Demographics play a big role. From 2000 to 2050, the number of seniors in California will triple, to 11.6 million in 2050. Seniors will account for about 20% of Californians in 2050, up from 11% now.

And the state's pension funds are already in trouble. In the next two years, the three major state pension funds will have obligations that amount to more than five times the state's revenue. The pension liability will triple by 2014, to $10,000 per working-age Californian, up from $3,000 in 2009. And public school enrollment will rise even as seniors depend more on Medi-Cal, increasing burdens on the state.

To deal with these rising costs, the state needs to raise the retirement age and increase employee contributions, the report recommends. It also will need to switch to a hybrid plan, in which a portion of the benefit is subject to market risk while a portion is guaranteed. Utah made this shift in March.

This could require some big changes in the way state employees view their pensions, the Milken report concludes. But something needs to be done as the population gets older and pension funds are obligated to make more and more payments.

"While the funding gap continues on its current trajectory, further delay is not an option," the report concludes. "The pension crisis is beginning to handcuff the state’s fiscal and financial planning process, and the situation has to come to a head."